The economics profession is captive to endless fallacies, but arguably the most ridiculous of them is the idea that money creation instigates economic growth. As a consequence, politicians and mystical economists have focused endlessly on “the Ms” and other money measures over the years; the belief being that that a planned increase of the various monetary aggregates care of central banks would result in a specific GDP outcome. Reducing “monetarism” to its absurd basics, the recipe for economic growth is “just add dollars.”
The problem is that the view is backwards. Where there’s production there’s never a lack of money. As opposed to money instigating production, it’s in truth a consequence of it. Put another way, Banco Central de Venezuela (Venezuela’s Central Bank) could produce endless bolivars (or very few) with little economic result either way. Since bolivars aren’t trusted by actual producers of goods and services, their existence is of little relevance to actual economic growth.
In reality, producers of goods and services do just that in order to get goods and services in return. All trade is products and services for products and services; money merely the trusted (a little or a lot) measure that facilitates exchange. Producers of goods and services take “money” for what they produce given their knowledge that the money will similarly command goods and services in the marketplace.
All of this rates mention with the multi-year collapse of the bolivar in mind. Collapsed currencies aren’t pushed around in cities or towns in wheelbarrows (however much that imagery from Weimar Germany endures) as much as they disappear. What’s in freefall is no longer money since no producer will exchange real market goods for what exchanges for much fewer.
The good news is that good money once again finds production. Always. We’re seeing this now in Venezuela. In an opinion piece published last week in the New York Times, Virginia Lopez Glass reported that Venezuela has no formal arrangement with the U.S. whereby its economy is “dollarized.” Of course, that Venezuela isn’t dollarized is of no economic consequence. Iran and North Korea aren’t “dollarized” either, but the dollar referees exchange in both countries just the same.
Glass notes that the dollar as of June was liquefying “nearly 70 percent of all transactions” in Venezuela. That the dollar has become the South American country’s currency of choice is a loud reminder that economists focused on so-called “money supply” are wasting their own time, and also the time of the surely bored individuals whom they minister about it to. More specifically, the Federal Reserve didn’t create economic activity in Venezuela via “open market operations” as much as what Lopez Glass describes as a “partial lifting of price controls and import tariffs” enabled the production that is always and everywhere a magnet for the money that moves the production around.
In other words, economies aren’t planned despite what economists and politicians tell you. In the real world, there’s no order to an economy; instead producers produce in order to get what they don’t produce. Money once again facilitates the transaction. That nominally freer Venezuelans are able to produce was all the information one would need that the country had moved toward “dollarization.”
Of course, the dollar’s role as prime trade facilitator in Venezuela tells much of the story, but not all of it. Lopez Glass adds that 15 percent of Venezuela’s population has left the country in recent years. Readers can guess why. A lack of economic freedom has a tendency to repel human capital. This is important simply because the individuals who’ve left Venezuela have had a big impact on Venezuela’s economy; albeit from a distance. Lopez Glass reports that “In 2019, the diaspora sent an estimated $3.7 billion to relatives, up from the $3.5 billion from the year before.”
What the above statistics tell us is that a not insignificant aspect of Venezuela’s “economy” in a GDP sense has nothing to do with what’s actually happening in Venezuela. Instead, production outside the country is enabling consumption inside it. GDP is much less than worthless, and also misleading. To be clear, Venezuela’s “economy” is in so many ways not Venezuela’s, yet alleged thinkers of the monetarist persuasion continue to promote the laughable fiction that so-called “money supply” in a country can be planned on the way to a specific GDP result. It would be funny if it weren't so sad.
Back to reality, production is a summons for money. Which means no reasonably intelligent person would ever worry about there being too little money in the city, state, country, or on the street where they live. So long as individuals are producing, there will always be money to move the production elsewhere. This is true even in countries like Iran, North Korea and Venezuela despite endless U.S. economic sanctions needlessly foisted on all three.
It's all a reminder of just how superfluous the Federal Reserve is. Get rid of it not because it’s relevant, but because it isn’t. While we’re at it, let’s scrap GDP too. Economists will panic, but then we really don’t need economists either.
